How Nonprofit Organizations Work in California
What You Need to Know about Nonprofits in California: Legal Basics Explained
Starting a nonprofit organization in California can be a powerful way to serve your community, but doing so comes with significant responsibility and many regulations. The first step is to get a clear understanding of the legal requirements involved. Whether your focus is charitable, educational, religious, or scientific, operating legally and maintaining compliance are essential to sustaining your mission.
This guide explains the legal basics of how nonprofit organizations work in California, from qualification and formation to governance and compliance.
What is a nonprofit organization?
Put simply, a nonprofit organization is a legal entity formed for purposes other than generating profit. Unlike a for-profit business, there are no owners or shareholders of a non-profit. Any income a nonprofit generates is used to continue its operations.
Typically, nonprofits are exempt from paying income taxes, although this is not automatic (see below).
In California, nonprofits are most commonly structured as either a nonprofit public benefit corporation, mutual benefit corporation, or religious corporation. Other forms include charitable trusts, and unincorporated associations.
How to qualify as a California nonprofit?
Before you can operate as a nonprofit in California, your organization must meet several eligibility criteria:
1. Purpose Requirement:
Your organization must be organized for a purpose recognized under California law and, if seeking federal tax exemption, under Internal Revenue Code section 501(c)(3). Acceptable purposes include charitable, educational, religious, scientific, literary, and public safety testing.
If you want to qualify as a public benefit corporation, including 501(c)(3) tax-exempt status, your activities must benefit the public at large, not a specific group of members or insiders.
2. Organizational Structure:
As discussed above, there are various structures for California nonprofit organizations, including
- Nonprofit corporation
- Mutual benefit corporation
- Religious corporation
- Charitable trust
- Unincorporated association
3. Governance and Operations:
The nonprofit must be governed by a board of directors, adopt bylaws, hold regular meetings, and maintain proper records. Directors must act in accordance with fiduciary duties, including loyalty, care, and obedience to the mission.
4. Compliance with State and Federal Laws:
After incorporating, you must register with the California Attorney General’s Registry of Charitable Trusts, apply for state and federal tax exemptions, and meet annual filing requirements. See below for more.
How does a nonprofit board of directors work?
Under California law, every nonprofit must have at least 1 director, though if you seek federal tax-exempt 501(c)(3) status, you must have at least 3 directors. The board of directors oversees governance, strategic direction, and compliance with both legal and ethical standards. The board is also responsible for adopting bylaws and holding regular meetings with recorded minutes.
Does forming a California nonprofit corporation automatically grant tax-exempt status?
No, simply forming a California nonprofit corporation does not mean you have tax-exempt status. See below for how to apply for tax-exempt status.
How to apply for tax-exempt status
Most California nonprofits seek tax-exempt recognition under both federal and state law. After incorporating, you’ll need to file:
- Federal tax exemption: IRS Form 1023 or 1023-EZ (depending on your current or expected revenue and other factors)
- State tax exemption: California Form 3500 or 3500A (typically it is easiest to file the 3500A, which is done after filing IRS Form 1023 or 1023-EZ)
Tax-exempt status exempts your nonprofit from paying certain federal and state taxes and allows donors to make tax-deductible contributions to your nonprofit.
How to maintain legal compliance
After formation, nonprofits must comply with ongoing reporting and registration requirements:
- File the Statement of Information (Form SI-100) every two years with the California Secretary of State
- Submit annual federal and state tax forms:
- IRS Form 990, 990-EZ, or 990-N
- California Franchise Tax Board (FTB) Form 199 or 199-N
- Register and report annually to the California Attorney General’s Registry of Charitable Trusts (Form RRF-1)
- Other general licensing and permitting
- Maintain accurate records, including meeting minutes, bylaws, and financial reports
Failure to comply with these obligations can jeopardize your nonprofit’s good standing and tax-exempt status.
Other operational issues: do business laws apply to non profit organizations in California?
For the most part, non profit organizations are subject to most business laws in California. However, there are significant differences, both more restrictive and less restrictive. For example, there are additional regulations for non profits in terms of conflicts of interest and self-dealing.
On the less restrictive side, non profits are legally allowed to accept volunteer workers to work for the organization without compensation (this is illegal for for-profit business). They may also legally conduct raffles, whereas for-profit businesses are prohibited from doing so.
See Non-profits vs For-profits: What are the Differences?
Are there any alternatives to forming a non profit organization?
Yes, there are some alternatives, including partnering with an existing nonprofit (fiscal sponsorship) and social enterprise.
1. Partner with existing nonprofit (Fiscal sponsorship)
This is where an established 501(c)(3) assists an individual or organization with a charitable program, where the 501(c)(3) usually charges an administrative fee or percentage of revenue (usually 5-15%)
Advantages: tax deductible contributions, easier/quicker than forming your own 501(c)(3), wider base of support (track record to show funders).
Disadvantages: lose some control, as the project is under control of the 501(c)(3); must be part of nonprofit’s charitable purposes; administrative fee.
2. Social enterprise
Another alternative to forming a non-profit is a social enterprise, which is a for-profit business that also has a mission to benefit the public in some way. See our Guide to Social Enterprise in California.
Further Resources
Guide to California Laws on Volunteer Workers
Non-profits vs For-profits: What are the Differences?
Guide to Social Enterprise in California
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